Friday's Projection Played Out; What Next?

On Friday, I drew a somewhat unconventional near-term projection, projecting the market would close at 1703 and decline first thing Monday.  Shortly after Friday's close, CME announced that it's raising margin requirements -- which is a bit of an unusual move, given the relatively low volatility we've had this year.  If we assume traders are net long after that rally, the newly-increased margin should impact bulls more than bears. 

Then over the weekend, Congress and the White House indicated that the only point on which they both agree is that they still hate each other.  In the spirit of true bipartisanship, the President stated that he wouldn't be willing to work with Congress "even if it was the last Congress on earth," while Speaker Boehner was quoted as saying he'd be willing to negotiate "only if President Obama stops making fun of my tan."  This rhetoric was markedly less virulent than last week's, so pundits are arguing that these statements mean we're extremely close to an agreement.    

All that to say: the news over the weekend wasn't terribly good, and futures are suggesting a decent-sized gap down for Monday's open.  This means I hit the short-term projections exceptionally well -- but I would caution that my short-term work is based on (oddly enough) the short-term; so neither the close at 1703 nor the ensuing gap down will guarantee that the intermediate wave counts are also correct.

This is a truly difficult position for intermediate prognostication, because the market has been essentially range-bound for the past several months, and very little information is conveyed within a range-bound market.  To make matters even more challenging, markets often move quickly through thinly-traded ranges, which can give the appearance of greater strength (or weakness) than is actually present, causing indicators to give false readings.  These are some of the reasons this is boiling down to an instinct call for me: there simply isn't much in the charts to argue definitively for one outcome over the other. 


I still feel it's more likely that the decline isn't done at intermediate degree, and that a stronger sell-off is pending.  And I think it's safe to say I'm probably bucking majority sentiment with this view: from what I've been able to gather, most everyone is expecting that Washington will get its act together reasonably soon.  I think everyone expects a nail-biter which then gets resolved in the eleventh hour -- and maybe that will happen, who knows.  If Washington announces a satisfactory resolution, bears will almost certainly cover in droves and send the market straight up in a vicious short-covering rally.  For that reason, this is not a position where I would continue to hold my shorts in the face of a solid market reaction to good news.  I'm hoping my short entry north of 1700 guarantees me some profit no matter what happens heading forward -- and hopefully Friday's update afforded readers that same opportunity.     

Let's start off with the S&P 500 (SPX).  This chart shows the trading range quite clearly.  The market really hasn't made much upwards progress since May; so while bears seem to be feeling more beat-up, the bulls really haven't had too much to cheer about lately either.  Range bound markets don't favor bulls or bears: they favor short-term traders.

Next is the SPX 10-minute chart; the preferred red count is unchanged from Friday's update, but I needed to adjust the green alternate count slightly.

Finally, the Philadelphia Bank Index (BKX).  BKX is one of the main things keeping me leaning toward the bear camp.  The alternate count on the BKX chart is for a completed ABC decline.  There are two reasons that count is the alternate and not the preferred count:

1.  The Fibonacci relationship between waves A and C is still a bit weak.
2.  The last decline didn't act like a c-wave.  C-waves are third waves, and they are usually strong and scary.  One of the "jobs" of a c-wave is to convince traders the trend has changed.  While the last leg of the decline in SPX was strong, BKX merely lollygagged around support and probably wouldn't have frightened even the most faint-hearted bull.

In conclusion, there genuinely isn't too much to add down here.  Bears should stay alert to a three-wave decline as warning of the alternate count.  Hopefully Friday's entry was solid enough that even in the event of the bullish count, we'll be alerted to bullish developments in real-time and be able to lock-in profits.  Trade safe.

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Bulls Shake-up the Charts

Yesterday saw bears capitulate en masse, while bulls trampled and gored everyone who got in their way, in the hopes that Washington's issues might get resolved soon.  As far as I've heard, nothing actually got resolved -- but perception is reality in the market.

As I talked about yesterday, the market had reached the toughest type of inflection point in Elliott Wave, and from there, it then proceeded to plow right over my preferred near-term count.  Most of the traders I've spoken to since the close are now bullish.  And why not?  After all, the market has had a persistent bid ever since the QE-Infinity liquidity started pouring into the primary dealers' accounts, and every halfway promising-looking decline of 2013 has turned into a new high in fairly short order.

The rally appeared to be impulsive, which suggest it isn't over yet, and normally, I'd look for another leg of equal or greater length.  However, I'm favoring an unconventional near-term count which I'll outline momentarily.

Frankly, I'm a bit uncomfortable with this market right now.  There are times the charts make perfect sense to me, and there are other times that there are portions of the wave count that I can't comfortably reconcile.  When I look at the charts right now, there are two conflicting things that jump out at me:

1.  The decline from the all-time high reconciles better as an impulse than a correction, and that leads me to suspect it's not over.

2.  The signals I saw at the close on Wednesday led me to expect a snap-back rally, but that rally's strength exceeded my expectations.   Yesterday's rally was a face-ripper, and bulls recovered a ton of lost ground in just one day -- normally, that suggests they have "money in the mattress" (or in the printing press, as the case may be) for more.

It's probably going to take an event to turn this market back down.  In my opinion, the charts are still hinting at the idea that we could get one.  But this is as much an instinct call as anything, and trying to predict an event is like trying to predict the winning lotto numbers, so feel free to ignore me and trade what feels right to you.

First up is the Philadelphia Bank Index (BKX), which could have completed gray iv -- however, in my opinion, it has the wrong look for a completed correction.  I'm presently inclined to think this index makes another new low before it makes a new high.

Next up is the S&P 500 (SPX) near-term chart.  I'm favoring a somewhat unconventional resolution here -- but again, this is pure instinct, and my instincts can be wrong.

Finally, the SPX hourly chart.

In conclusion, I'm fully prepared to shift my intermediate footing depending on how the next couple sessions shake out, but I still feel the charts have bearish potential and, at the moment anyway, still feel that they'd look better with a new low.  Trade safe.

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Bad Moon Rising? Or Let the Good Times Roll?

I stole part of today's title from the famous CCR song "Bad Moon Rising," in which John Fogerty passionately sings:

Don't go around tonight, 
well it's bound to take your life,
there's a bathroom on the right.

Or that's what it always sounds like to me, anyway.  I assume he's singing about one of those highway rest-stop bathrooms, in which case this chorus is very sound advice.

On a more serious note, this is the toughest type of inflection point in Elliott Wave.

We've reached a point where the market has a clean three-wave decline.  Because of the nature of the bigger picture wave structure, we can't be certain whether to expect this decline to become five waves, or whether this ABC decline was all the market wanted here.  Let's start with the Nasdaq Composite (COMPQ) for illustration purposes:

 
Strangely, the part of this move that had lots of folks confused (last week) felt pretty straightforward to me, and I couldn't find any high probability outcomes that didn't require a continuation of the decline.  That has now changed, and we can see on the chart above that the market currently has potential for a fairly clean, and possibly complete, ABC decline.  We also see that it has so far found support where it "should."  Most of the markets I look at have reached similar support zones, with NYA, INDU, and SPX among them.

But not so fast -- when we look at RSI on the above chart, it suggests the market will want to retest or break yesterday's low.  And that fact is one of several that leads me to give the edge to the bears and assume we're dealing with a reaction rally until proven otherwise.  Additionally -- not to get too far ahead of the market -- but some of the charts I've studied suggest the possibility that this is yet another second wave bounce.  If that's the case, the market is actually gearing up for a mini-crash.

This is dangerous territory for bears here, though, because this is an inflection point where bulls genuinely have a chance to grab the ball at intermediate degree.

Thus my confidence in what's coming next is lower than it has been to this point.  If I had to pick a side, I'd say the bounce is going to be short-lived, and bears are going to reclaim the market in fairly short order.  That logically leads me to consider the two big news events: the ongoing government shutdown, and the debt ceiling deadline on Friday.  Futures are up big right now on the news that the President and the GOP are going to meet and talk -- if my bear thesis is correct, then I suspect those talks will end in failure.

It's always easy to talk theory, but as traders, how do we approach the market when the charts are ambiguous?  With the charts at larger inflection points and major "blow up the tape one way or the other" news announcements coming, I generally do one of two things:  I either avoid the market entirely, or I look for areas that I'd consider as lower-risk near-term inflection points which could reverse a move.

The two zones that jump out at me on the S&P 500 (SPX) are 1670-74 and 1680-85.  Both of those zones have the potential to offer resistance and reverse a rally.

And as I'm writing this, I can't seem to get 2008 out of my head, and I'm reminded of the monster rally we had just before the crash started.  That rally was a Gift from Above for me, and I shorted into it with every dime I had.  In 2008, though, I felt almost 100% certain we were about to crash -- so certain, in fact, that I literally couldn't even comprehend who on earth was buying the market there, or why.  I don't feel anywhere near that level of confidence here at the present inflection point, but I do think there's potential for a solid risk/reward play to catch either a fifth wave down to new lows, or a much more serious decline.

In other words: this is not the type of place where I'd bet the farm with no stops, but certainly the type of place where I'll take a crack at things if I can find ways to limit my potential losses.

Let's take a quick look at the other side of the trade, though.  While I'm still in the bear camp for the moment, the ratio chart below suggest bears should indeed approach this market with caution:

The Dow Jones Industrial Average (INDU) has reached the bottom of a large trading range -- this is one of the charts I referenced earlier regarding markets that reached support zones yesterday.

Finally, the SPX chart.  As noted, I'm inclined to favor the bears -- but this isn't a clear-cut slam dunk to me the way last week's charts were.  Yesterday's market found support about a point shy of where it "should have" for the bullish alternate ABC decline.

In conclusion, the charts are clearly lining up for "an event," and we have two big news items on the horizon.  The bulls have potential here, and I'm not closed to that; so if the present rally forms itself into five larger waves, then we'll have to start thinking bigger rally and start looking at new upside targets beyond the two noted zones.  That bull potential makes me a cautious bear, but we're still just dealing with a potential and we aren't actually to the point where it's become high probability.  On balance I presently think the odds still favor the bears; and that means we have to take that thesis to its logical conclusion:  if the bearish wave counts are correct, then bears are getting ready to hit the market hard.

So to close out the question posed in the title of today's article:  There may indeed be "a bathroom on the right" in the market's not-too-distant future.  Trade safe.

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S&P 500 Reaches September's Downside Target -- What Next?

Let's get one thing straight: The stock market is not anyone's friend.  The stock market is a vicious and brutal killing machine which chops the unwary into tiny bits.  Then, after it takes their last dime, it proceeds to head the direction they were hoping it would before they got chopped up.  The stock market hates you -- especially when you make money from it.  When you win, it wants that money back, and it will try to goad you into taking higher risks afterwards.  Even as it pays you your winnings, it will laugh the way John Malkovich did in Rounders and say:  "Fine.  It's a joke anyway.  After all, I am paying you with your money." 

One of the great cultural illusions still left over from the Great Bull Run is that the stock market is a friendly place, where ordinary folks can get rich.  This illusion has been reinvigorated recently by the recovery of equities markets to fresh all-time-highs.  But the market is not a friendly place: Equities are a process of price discovery, a whirlpool of liquidity, a zephyr of global uncertainty, and a casino-full of seemingly-friendly dealers who are happy to take your money and leave you with nothing.

Every trade has two sides, and the person or institution on the other side of the trade you just took isn't buying or selling so that you personally can make money.  Quite the opposite: Their goal is to make money too; so while it's not anything as insidious as "trying to make money at someone else's expense," the reality is that every single trade has a losing side.  Which makes the stock market a financial battleground.   

Recently, we discussed that the charts were suggesting a pattern of buying that was premature, also known as a bearish nest of first and second waves.  These 1-2 wave patterns are not only vicious to bulls because of their ultimate resolution lower; they're also vicious to unwary bears.  The pattern tends to get shorts covering right when they should be holding.  That's the psychology of the beast. Shorts have held through each of the wave two rallies and experienced lots of draw-down along the way, so they become increasingly anxious and skittish, and they become conditioned to expect another rally right when the third wave down hits.  It's a war; the market wants everyone's money.

Yesterday, the White House announced that Obama will nominate Janet "Stop with The" Yellen as next head of the Federal Reserve.  Futures put in the obligatory "oh, hurrah" bounce on this news, which strikes me as a non-event.  I doubt this announcement came as a big surprise to anyone who has cable television, though futures remain green as of this writing.

The first chart we'll look at is the S&P 500 (SPX) which has now captured September's downside target.  A small reaction rally, perhaps to revisit the key trend line which broke yesterday, would not be out of the ordinary.  If the most bearish 1-2 count is unfolding, bounces should remain fairly muted for a time.  The next downside target is 1640-45, which would be the target for the alternate bullish ABC count, and it will now require sustained trade above 1675 to call that into question.

On October 2, I noted that the wave count appeared to be even more bearish than I'd anticipated up to that point, and added a lower target for the preferred count of 1600-1610.  I've updated this chart to reflect that target, though part of me wants to add an asterix behind it, since it may need to be adjusted in real-time as the wave unfolds.

 The next chart provides a closer look at trend lines and channels:

Finally, the Philadelphia Bank Index (BKX) is, interestingly, still a bit shy of reaching August's preferred downside target.  The red annotation was added for today's update.

In conclusion, sellers accomplished exactly what they needed to yesterday, and broke through a key intermediate support line.  Most of the charts I've looked at suggest further downside awaits -- and if this is indeed a nested third wave, we still have a ways to go.  Trade safe.

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Why the Buy-the-Dip Mentality Could Lead to Trouble

Last week, I remarked to a few other traders that the "buy the dip" crowd seems to have been out in force lately, and that if and when support broke down, those buyers should provide heavy resistance to any rallies.  When observing the price charts, it appears every dip has been bought quickly.  This is leading to a halting decline that doesn't seem to want to get rolling.  From this behavior, we can extrapolate that most everyone is anticipating a positive resolution to not only the government shutdown, but also to the approaching debt ceiling deadline (October 17). 

This psychology of positive expectation is consistent with the latter stages of a bull run.  Contrast the current psychology with the last debt ceiling crisis, at the end of 2012.  The markets were fearful and panicky then, and lots of folks were convinced we were about to crash.  Of course, the ultimately-positive resolution then kicked off a massive rally which has continued largely unabated through the present.  That psychology of fear was consistent with the early stages of a bull run.

I've talked about this many times, but in order to grow legs, bull runs need sellers just before the move starts.  Those sellers then become buyers on the way up, and actually fuel the move.  Conversely, bear runs need buyers positioning themselves wrong ahead of time, so those buyers can become sellers on the way down.  The majority simply has to be on the wrong side of the trade for any extended move to occur -- and that's where the psychology comes in.  Expectations have to be the inverse of the ultimate reality, in order for traders to position themselves incorrectly in the first place.

So sentiment has to be bullish for a bear move to start, and it has to be bearish for a bull move to start.  Just as we watched sellers position for the negative outcome back in December, we may now be witnessing buyers getting positioned for a positive outcome that never materializes.

Obviously, I can't tell the future -- but what I can tell is that if things go south, they're going to go south quickly, because the charts are showing us this.  Frequent readers have heard me use the term "nest of first and second waves."  That's Elliott Wave terminology -- in simple terms, (in a decline) a nested series of waves shows us buyers jumping in at each new low, which prevents the move from gaining steam early on.  This has a coiling effect on the market, and the price charts show us how the majority of traders are positioning themselves.  Since they're on the wrong side, when the move finally breaks and kicks off the third wave, it runs hard and fast as those early buyers suddenly exit en masse. 

On Friday, I noted that it's difficult to find a pattern that doesn't require new lows, and mentioned that we may see a big gap down come Monday.  Right now, futures are suggesting a double-digit gap lower for the S&P 500 (SPX) -- and Friday's action has allowed me to narrow down the potentials further, and also to provide some qualifiers to help sort one from the next.  The chart below outlines the details (on #2, "idea" should be "ideal."  A lack of typos would be "idea," but I can't seem to live up to that ideal.)

It's worth noting that the NYSE Composite (NYA) has dipped below the first key pivot, and if Monday's gap down sticks, will have been firmly rejected on the back-test.

The first blue-box target zone on the legacy SPX chart has come within a few points of capture, and presently looks likely to be captured in the upcoming sessions.  If the nest of first and second waves is unfolding, the market will ultimately blow through that target.

In conclusion, I still feel it's unlikely the market will escape new lows.  To the contrary, the pattern continues to appear to be a bearish coiling pattern, and trade below 1665 is likely to lead to an extended sell-off.  Presently, the most bullish pattern I can find (of good probability) is simply an ending diagonal c-wave that grinds a bit higher to start off the week.  Trade safe.

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How Many Fed Chairmen Does It Take to Replace a Light Bulb?

Q: How many Fed Chairmen does it take to replace a burnt-out light bulb?

A:  None.  The Federal Reserve is not currently forecasting any darkness, and feels the fundamentals support continued illumination.

Last update expected lower prices, and the market has since delivered.  Looking at the charts now, I still find it difficult to locate a pattern which suggests a meaningful bottom has occurred.  There's one potential pattern that's intermediate bullish, but the short-term charts suggest even that pattern would still require a new low.

We'll start off with the S&P 500 (SPX).  Most of the details are in the chart annotations, but to quickly summarize:

1.  The decline from 1696 is clearly three waves right now.  That leaves open the potential of an expanded flat (shown in blue).  The market will need to break out over the black and red trend lines to give that pattern legs, and the possible targets in that event are noted.

2.  The mega-bear potential is that the market is winding up for a big, sustained decline (a bearish nest of first and second waves).  That option is shown in black.

3.  There's really only one bullish potential I can find, which also results from the three-wave decline: an ending diagonal c-wave which tests the blue trend line.  Bears don't want to see another three-wave decline here, or that pattern gains traction.  Below 1657, and we can probably forget the bullish alternate for the time being.


Given the complexity of the options, I've tried to simplify this chart as much as possible -- and the main simple point to convey is: I find it hard to locate a pattern that doesn't still require new lows. 

 

 
The Philadelphia Bank Index (BKX) also still appears to want new lows.  This chart is virtually unchanged since early July.

The Dow Jones Industrial Average (INDU) has been a real dog lately, and the decline off the all-time-high has been relentless.  We've previously discussed the massive potential broadening top/megaphone pattern.  While INDU managed to clear August's engulfing candlestick last month, it's interesting to note that INDU has formed another bearish-looking monthly candlestick for September.  The long wick shows INDU's advance to the all-time-high was met with strong selling pressure... again.

In conclusion, I don't see much that suggests the market can escape another new low.  If bulls can form another three-wave decline here and stick save SPX at the major trend line, they could finally put a stop to the decline.  If they can't, then what we've seen so far has only been the warm-up, and the market is going to run into some serious selling pressure very soon.  Trade safe.

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Reaction Rally or Meaningful Bottom?

If W.C. Fields were still alive, he might change his famous punchline to: "I went to Washington D.C., but it was closed."  On Tuesday, the market acted as if Washington's shutdown was the best thing it had heard in weeks -- a clear case of "sell the rumor, buy the news."  However, I think the rally was a second wave fake-out, and continue to believe we're headed for lower prices.  I don't believe we're headed lower because of the situation in D.C., per se -- I follow charts first and news second, and I felt the charts were pointed lower before all this started.  However, the situation in D.C. could be the catalyst the psychological shift the charts were suggesting was due to occur. 

How long will the shutdown last?  Well, in one sense, politicians have already crossed the Rubicon and are past the hardest part of actually letting the government shut down.  Now that the deadline has passed and the worst has happened, one would think the immediate psychological pressure to reach an agreement is at least somewhat lessened.  In other words, if politicians couldn't reach an agreement when they were under the gun, it seems unlikely that they'll suddenly reach one tomorrow.  I obviously have no idea how long it will continue, but by this reasoning, it could drag on for a while -- and this type of event tends to increase market volatility.  Markets are generally uncomfortable with gross uncertainty, and the government shutdown is creating lots of future uncertainty.    

There are some other effects from the shutdown which will impact the market in both subtle and obvious ways:

1.  Economists estimate a loss of 0.3% of GDP for each month Washington remains shut down, so there is a direct and negative economic impact.

2.   The Labor Department won't be reporting September's nonfarm payrolls (NFP), which impacts us as soon as Friday.  This is probably fine, since they'd only need to revise the number later anyway.

3.  The Commodity Futures Trading Commission (CFTC), which is the agency that regulates the trading of options and futures, has only 28 of its usual 680-member staff monitoring for market manipulators and unusual activity.  Since they're no longer watching, I wanted to personally verify there was nothing suspicious going on in the futures market -- so last night I put in a couple small orders, both to be filled at market. I'm happy to report that the market was functioning smoothly, and my ES (E-mini S&P) market buy order was filled instantly and seamlessly, at ES 25,392.50.  I likewise had no trouble selling those same contracts later with a market sell order, and was quickly filled at ES 105.75.  Maybe I'll stick to limit orders until the CFTC returns...

On top of the shutdown, we have the debt ceiling crisis still approaching.  On October 17, the government has to stop borrowing money if an agreement isn't reached.  This is of course a problem for a government that borrows .40 of every dollar it spends.

The charts continue to suggest to me that further downside awaits, and the first chart I'd like to share is the 5-minute S&P 500 (SPX) chart.  The action on Tuesday caused me to revisit the short-term wave count, and there are presently two main options which could fit the structure.  My preferred count is that the decline represents five waves, while the last rally was an ABC correction to that decline.  The first alternate is just a variation on the theme, and an option that's simply unforeseeable:  the market can string together a series of three corrective sequences to form a larger ABC, thus creating a more complex corrective rally.  I can't predict that in advance; I can only anticipate it as it unfolds in real-time.  There are already enough waves in place for the reaction rally to be complete, so I'll stick with that interpretation until proven otherwise.

The more truly-alternate count is shown in green, which considers the possibility that the market has declined in a somewhat oddly-structured ABC fourth wave.  That option will start to gain more traction if the market reclaims 1697, especially on a closing basis, but I'd have to see the form it takes to determine whether a break over 1697 is simply the black alternate playing out (which would be my first inclination).  The only thing that looks even marginally iffy for bears here is the breakout and thus far successful back-test of the black channel; bears need to push the market back through the upper black trend line and keep it there.

That's a lot to digest -- so under the "keep it simple" philosophy: it appears most likely that the rally is over, and we're headed for new lows.

   
Next up is the Philadelphia Bank Index (BKX), which still looks like it needs further downside before we can start considering the potential of a complete fractal.  Even if this is the intermediately-bullish ABC, one generally expects to see a much better Fibonacci relationship between waves A and C than there is currently.

There are a few things worth observing on the SPX hourly chart.  First, notice the breakdown and apparent back-test of the red uptrend line (bearish); second, RSI confirmed the low at 1674, which usually indicates that prices will break that low heading forward (bearish); third, note that black wave (1) hasn't been overlapped yet, which still allows the potential for a final thrust toward "alt: (5)" (this is not bearish or bullish, it's simply a fact).  The black uptrend line appears to be absolutely critical for the bulls over the intermediate term, and of course we're not there yet.  If my near-term preferred count is right, we should at least test that price zone in the upcoming sessions.

In conclusion, I can see there's outlier potential present for a bottom, but I don't feel it's likely the market has put in a meaningful bottom yet, so I remain in "sell the bounce" mode for the time being.  If the preferred count is correct, the market is on the precipice of continuing the decline, and should pick up momentum heading forward.  Since nothing is ever a sure thing, stay alert to the alternate counts if the decline starts to look like it's three waves instead of five, and bears can't crack 1675.  Trade safe.

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